Mean-Spirited, Bad Economics

The principle behind unemployment insurance is simple. Since the 1930s, employers – and in some states employees — have paid insurance premiums (in the form of payroll taxes, levied on wages) to the government. If people are laid off through no fault of their own, they can claim this insurance – just like you file a claim on your homeowner’s or renter’s policy if your home burns down.

Fire insurance is mostly sold by the private sector; unemployment insurance is “sold” by the government – because the private sector never performed this role adequately. The original legislative intent, reaffirmed over the years, is clear: Help people to help themselves in the face of shocks beyond their control.

But the severity and depth of our current recession raise an issue on a scale that we have literally not had to confront since the 1930s. What should we do when large numbers of people run out of standard unemployment benefits, much of which are provided at the state level, but still cannot find a job? At the moment, the federal government steps in to provide extended benefits.

In negotiations currently under way, House Republicans propose to cut back dramatically on these benefits, asserting that this will push people back to work and speed the recovery. Does this make sense, or is it bad economics, as well as being mean-spirited?

(For details on the current benefit situation, see this information from California, as well as this on the political background. After a two-month extension of benefits at the end of last year, the terms of continuing it are currently before a House-Senate conference committee.)

The United States has lost more jobs than in any other recession in the last 70 years – and jobs have been slower to return, as this chart shows.

In raw numbers, we lost more than eight million jobs, most of which have not returned. Paul Solman of the PBS NewsHour prefers a measure he calls U-7, which includes “the underemployed and those who want a job but have been out of work so long that the government no longer counts them; this currently stands at 16.9 percent of the workforce (see this story and also, for background, a discussion Paul and I had in the fall on the “shape” of the recovery, in which we rely on the B.L.S. data.)

However you want to count it, the financial crisis of 2008 brought on a jobs disaster — and the scale of this disaster is still with us. We like to say that the recession is “over,” but this just means that the economy is growing again. In no meaningful sense is the jobs crisis over.

Typically in the United States, most people are unemployed for relatively short periods of time, with a lot of movement in and out of unemployment. The fraction of long-term unemployed as a percentage of all unemployed is usually 10 to 15 percent. In the early 1980s, it briefly reached almost 25 percent.

Again, however, our experience since 2008 has been dramatically different – the share of long-term unemployed in total unemployed is close to 45 percent. And it appears to be staying at or near that level for the foreseeable future.

The House Republicans now propose to change many rules under which the federal government provides “extended benefits” to people who have exhausted their state benefits.

In most countries, unemployment insurance is managed primarily by the central government and its agencies – in our federal structure we have preferred, as with other kinds of emergencies (such as natural disasters) to have the states provide the first line of defense, with the federal government providing back-up. It is the federal government that has the strongest ability to borrow at low interest rates; most states are much more strapped for cash.

Do not be deceived by claims that the federal government is “broke,” in the sense that it cannot afford to provide additional support to states and people at this level. This is a myth, pure and simple.

Perhaps the most obvious – and most obviously wrong – proposal is for the federal government to support extended benefits only when unemployment is higher now than it has been on average over the previous three years (in legislative jargon, this is known as a three-year look-back). But three years ago was early 2009 – when the jobs crisis was already well under way. In you were caught up in the initial downdraft from the collapse of Lehman Brothers, you would be left on your own. The look-back should either be updated or, preferably under these circumstances, suspended entirely. Neither the GOP nor – amazingly – the Obama White House have yet taken any steps in that direction.

Along with other policy changes, the Republican proposal would cut up to 40 weeks from the existing available federal unemployment benefits.

The jobs crisis was caused by recklessness in the financial sector, made possible by irresponsible deregulation (including when Republicans controlled Congress and the White House) and resulting in enormous unconditional bailout protection for the bankers at the heart of the disaster (under both President George W. Bush and President Obama).

Let’s be generous for a moment and simply state that mistakes were made – on an enormous, macroeconomic scale with gut-wrenching consequences for families around the country. Why would anyone now seek to punish these people when they seek work but cannot get it?

In some parts of the Midwest, there are roughly four unemployed people for every job vacancy; there are similar figures in many other parts of the country. Simply telling people to move is also not helpful – where exactly do you see hiring on a scale that would put a dent in these overall numbers?

Extended unemployment benefit provides on average about $300 a week – one-third of the average weekly wage and only about 70 percent of the poverty level for a family of four. If you strip even this money from people who remain out of work through no fault of their own, you will push more individuals and families onto the streets and into shelters. The cost of providing those fall-back services is very high – and much higher than providing unemployment benefits.

How does it help any economic recovery when the people who lose jobs cannot even afford to buy basic goods and services – enough to keep their family afloat?

This was the profound insight – under tragic circumstances – learned from the Great Depression. Unemployment insurance and Social Security were introduced together in the 1930s and funded in the same way – through payroll taxes. As President Franklin Delano Roosevelt said at the time (quoted by David M. Kennedy in “Freedom From Fear,” on Page 267):

“We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security programs.”

That logic worked for nearly 80 years. In the face of our modern mean-spiritedness, it now seems likely to collapse.

32 responses to “Mean-Spirited, Bad Economics”

Simon, you repete through no fault of their own, which may be more true than false. But in the end someone has to be at fault and the consequences paid back. The housing bubble was the cause for all the jobs created, it burst and yes many people lost jobs. But they should not have lost their ability to conserve and be efficient, that’s where the real savings are. Had there been no bailout the cost of energy would be cheap, this itself, over time, would have brought back the economy. Instead we have runaway hyperinflation which has lead to high energy costs which is the worst time to try to rejuvenate an economy, and feed low income citizens.

Sorry Simon, but the like the proverbial broken clock that’s right twice a day, the Tea Baggers are right on this one. Indefinitely unemployment benefits need to come to an end. There’s comes a point in time where labor needs to shift to where the work is. That’s why my parents were born in West Virginia, I was born in western Virginia, and my kids where born in northern Virginia. We followed the work. It’s painful sometimes, but it’s necessary.

We do not have “runaway hyperinflation”. Not really sure how the bailouts are connected to energy prices directly, but it’s not a direct relationship and not a strong correlation if there is a correlation at all. Energy (as well as most food commodities) is priced globally and it reflects global supply and demand.

Owen Owens please cite the specific statistics on “runaway hyperinflation” because, when I look at all the stats, it simply isn’t there. Or is this just another tiresome paragraph about your political ideas that have no basis or justification in reality? If so, there are plenty of other places you can post utter garbage on. Might I suggest Yahoo boards anywhere. Here we actually know how to do maths.

When does the unemplyed become large enough to affect the life comfort of the employed and the 1%? When will unemployment get large enough to include all the people who have a false impression of their culture level? It would appear for the 1%; this would occur when the 99% become unable to provide the services required.tggt@windstream.net

UI involves societal tradeoffs — it’s both a safety net and a disincentive to ‘go where the work is’ as someone above put it. This is just an anecdote, but my sister-in-law refused to take any job she considered ‘below her’ until her UI ran out. Now she works at WalMart, a step down in pay and esteem from her previous job, but a step she would not have taken if she were still drawing UI.

This is why Simon Johnson is no better than a unionized thug (also known as Tenureship if your union is made up of ‘educators’ in academia)

He quotes…

“…The jobs crisis was caused by recklessness in the financial sector, made possible by irresponsible deregulation (including when Republicans controlled Congress and the White House)”

As an Indian, i am very used to Simon’s British brothers taking it upon themselves to “educate the uneducated” with the idea that the British are a superior, cultured race and that everyone else is an uneducated moron.

Simon assumes that the American population 1) did not know what was going on 2) does not know how to count and 3) is not capable of managing their own finances and 4) a bunch of uneducated morons.

This is the underlying assumption of all the ‘academic’ work behind the mortgage crisis.

As long as all the problems in America can be traced to big Banks, Simon’s job is secure.

Ignored in all this is the fact that millions of jobs have been moved overseas by the manufacturing and the Technology industry.

Apple employs 3000 engineers in China, not California. I am waiting for more ‘academic research’ to show that Goldman Sachs held Apple at gun point and forced them to move production over to China.

If you guys are still believing in gvt charts and stastics, that’s where you made your mistake. Other country’s have so much of our money because our trade deficit is to the tune of $729 billion every 3 months to these country’s. And after a few decades it adds up, and its called hyperinflation, when other country’s have alot of your country’s money, they can better compete with the average citizen. Do the right math, not the math you are instructed to look at.

Here’s *reality* about people who lost their jobs as business owners, then lost their homes, and then took a job in the *service sector*:

“….In 2006, Ricardo Zapata’s four-year old electronic component business was thriving, selling millions of small parts essential to taxi meters used throughout Latin America….In late 2007, Ricardo Zapata’s business began to slow. By 2008, both Zapata and his clients were having a hard time getting the credit they needed to trade across international borders. Zapata laid off all 12 of his employees, then officially closed the business but continued selling what was left of the company’s inventory….Ricardo Zapata has a new job managing a Cuban restaurant. The family has a lot less money and little hope of owning a home again in the next decade….”

Psycho-economics is going to get some creative destruction blowback – just call it *growth*….

“….In 2006, Ricardo Zapata’s four-year old electronic component business was thriving, selling millions of small parts essential to taxi meters used throughout Latin America….In late 2007, Ricardo Zapata’s business began to slow. By 2008, both Zapata and his clients were having a hard time getting the credit they needed to trade across international borders. Zapata laid off all 12 of his employees, then officially closed the business but continued selling what was left of the company’s inventory….Ricardo Zapata has a new job managing a Cuban restaurant. The family has a lot less money and little hope of owning a home again in the next decade….”

@ Esteban, I feel your pain. The commenter ‘Annie’ doesn’t say anything that correlates to reality, so just ignore her. Pretty soon she’ll start misusing capital letters a lot if this comment upsets her. Regarding your anecdote, I was in a similar situation once. I used to accompany my dad to the unemployment office in southern Ohio, and we would see people openly offering bribes to get to prolong their coverage. It was rampant. Local restaurants were notorious for accepting $10-$20 to ‘give an interview’ with no intention of hiring, just so the person could be re-approved on unemployment insurance.

As far as the original post goes, totally off the mark. Check out the early paper by Lancaster showing how for a given censored unemployed person, their distribution of time-to-next-job (or duration of unemployment) has a downward sloping hazard function. Downward sloping! That means that the longer someone goes unemployed, the less likely they are to ever find a job.

Statisticians and econometricians have studied this effect endlessly, and earnest folks who care about the unemployed and want them to get help still do advocate limiting unemployment. I personally think that this is not the business of the federal government whatsoever. It should be a private service to buy unemployment insurance, and if it isn’t, that probably means it’s not a sustainable enterprise, hence the government shouldn’t be doing it either.

The most frustrating thing though is that Simon just wants to call people mean-spirited. You can’t make any progress or try to compromise with people that see the world differently if you just call them bad and stupid for thinking something different than you do. Some smart people earnestly believe that reducing unemployment benefits is a compassionate good thing, both in moral principle and in terms of what the research suggests the net effect will be.

Some people also outright challenge your claim that the U.S. budgetary problems are just myths. I’ve read the series of Baseline Scenario posts on why you guys think the budget is projected to be fine even at current expense levels, and I just don’t see it. You don’t present a case for anything; and you rely heavily on CBO estimates that openly admit that they ignore extremely important factors (such as hiring effects on small businesses). As I see it, it’s your job to make a case for why those data are compelling. It’s not our job to say why we aren’t mean-spirited just because we are not convinced by your analysis.

@Desi – “….Apple employs 3000 engineers in China, not California. I am waiting for more ‘academic research’ to show that Goldman Sachs held Apple at gun point and forced them to move production over to China….”

Dunno – files coming out now…Good luck with 3000 Apple Jobs in the land of a billion….sooner than later costs of transport will matter…

@bob – in what year was this…? Was your Dad one of the ones wanting to not work? And if not, did he report the fraud he witnessed…?

“… I used to accompany my dad to the unemployment office in southern Ohio, and we would see people openly offering bribes to get to prolong their coverage. It was rampant. Local restaurants were notorious for accepting $10-$20 to ‘give an interview’ with no intention of hiring, just so the person could be re-approved on unemployment insurance.

It was between 1993-1998 when I was in grade school. No, my dad was discharged from the military and unemployed. He was always extremely proud and absolutely hated the fact that he needed unemployment benefits. He eventually became a prison guard, and frankly, being a prison guard has damaged him a lot worse than being unemployed ever did.

He didn’t report any fraud because his worldview is basically that everyone’s out to screw him over. He’s a bit too cynical (though plenty of unlucky things did happen to him). He figured he might even get in trouble or be denied benefits if he tried to report anything because the unemployment office managers in our town seemed in on it. It sounds like it should be easy to report something like that; but in practice it isn’t.

Anyway, I’m not at all saying that we should base unemployment policy on the outlier observances in presumably one isolated, corrupt branch of an unemployment office. So hopefully folks did not misunderstand me. My real issue is with Simon’s desire to name call instead of engage with the fact that other smart people have looked at facts too and still disagree with him.

The GOP has super-ceded just a question of mean-spiritedness, Simon: the GOP today with no hyperbole is a death-cult, as this proposed gutting of unemployment benefits demonstrates.

While the black-hole of massive derivatives bailouts cost trillions, and literally did nothing to aid the real economy. I gather keeping people who are jobless going is anathema to the GOP death cult.

Tax WALL STREET TRANSACTIONS….a sales tax….begin with a modest 1% on financial transactions and distribute proportionally revenues collected to states, and this can be allocate to shoring up state unemployment funds that are depleted.

Wall Street caused this mess, let them pay, the dirty buggers. And Efffffffffff the GOP death cult while you’re at it.

And to the “fighter pilots of high finance” (such hubris) working on the “Street”……..GET off your high horse, you’re not all that………

@bob – now there’s an industry – for-profit jails – that should have incorporated drone technology and other robotics, plus make all working parts (doors, food delivery, etc) fully automated – basically not have the need for a NORMAL human being to come into any direct contact with the criminals.

No place is free from the consequences of a double set of rules – just the other day, a hub-bub stirred around me in the library’s section that houses the rows of computers which link to the internet. The gang of after school kids all around me were stirred up so I stood up and asked them what’s wrong. A grey-hair had been looking at a bestiality porno site and the kids were disgusted and upset and set one kid to report it – by then the dude had switched to another site – and I am NOT speaking an untruth here – it was the RNC website. So the grey haired librarian brought over a privacy screen and he refused to use it…

having found a sympathetic ear in me, I got the whole story both from the kids and the ladies at the Information Desk about what a chronic problem this man is – and how, by law, they can’t do anything about him. I didn’t think it is just the *law* – so I checked into it and this dude is FILTHY rich.

Told the kids to flash mob the guy in the heat of the moment next time it happened, and not to hold back with expressing their feelings directly to him while he sits there acting all normal….

Yes there are good, filthy-rich people – somewhere, never met one in the flesh, but it is a theoretical possibility I’ll allow – but when all that money is in one set of hands that finds nothing better to do than visit porno sites in the library when it is full of after school kids – well, doesn’t a little bit of controlled, tough *mob mentality* edge in a *democracy* have a place as *law* when abuse of *freedom* is in your face?

@ Esteban: Your sister-in-law and/or her previous employer *paid* for Unemployment Insurance, you did not, so you have no business or right to be criticizing her for using it to try to find comparable employment while collecting it. Got it? That she was unsuccessful, and took a lower paying job demonstrates her willingness to work for less when conditions demand she do so. That is praiseworthy, got it?

@ Desi Girl: “This is why Simon Johnson is no better than a unionized thug (also known as Tenureship if your union is made up of ‘educators’ in academia)”

“…The jobs crisis was caused by recklessness in the financial sector, made possible by irresponsible deregulation (including when Republicans controlled Congress and the White House)”

And so it was…your point? Glass-Steagal was dissolved, and look at the results….to point it out is hardly “assuming that the American population (is) a bunch of uneducated idiots”, rather it assumes they may need reminding how we got there, as the major media outlets are controlled by the large corporation, and banks. Got it, honey?

“As an Indian, i am very used to Simon’s British brothers taking it upon themselves to “educate the uneducated” with the idea that the British are a superior, cultured race and that everyone else is an uneducated moron.” Wow, this is relevant to the discussion…how?

“Simon assumes that the American population 1) did not know what was going on 2) does not know how to count and 3) is not capable of managing their own finances and 4) a bunch of uneducated morons.” How many get their news and information from corporate-paid Talking Heads on msm, sweetie? They are lied to, and Simon is not lying to them…and this upsets you? *Interesting*

“This is the underlying assumption of all the ‘academic’ work behind the mortgage crisis.”

Hardly, most “academic work” still pushes the obscene Chicago school of economics theories on America…to it’s great misfortune. Simon does not. of us

“As long as all the problems in America can be traced to big Banks, Simon’s job is secure.” Where does Simon allege “all the problems”, snookums? Nice try.

“Ignored in all this is the fact that millions of jobs have been moved overseas by the manufacturing and the Technology industry.” Ah yes, now you state fact…but who paid lobbyists to drop tariffs on imported goods, Desi Girl?

“Apple employs 3000 engineers in China, not California. I am waiting for more ‘academic research’ to show that Goldman Sachs held Apple at gun point and forced them to move production over to China.”

They didn’t have to: they paid their lobbyists to bribe congress to give TAX BREAKS to corporations shipping our jobs overseas…then passing laws allowing them to repatriate profits untaxed or at drastically lower tax rates than existed.

Seems the Desi Princess was the one that assumed Americans can’t see through the BS she spouts: Fail.

@selfprogrammed: “@ Esteban: Your sister-in-law and/or her previous employer *paid* for Unemployment Insurance, you did not, so you have no business or right to be criticizing her for using it to try to find comparable employment while collecting it. Got it? That she was unsuccessful, and took a lower paying job demonstrates her willingness to work for less when conditions demand she do so. That is praiseworthy, got it?”

Uhhh, nope. That’s not how things work in a democratic, rational society. You do get to criticize anything and/or everything if you want to and the common currency of argument is evidence. You can criticize the choices of Jehovah’s Witness parents that refuse to allow their children to receive certain life-saving treatments, for example, even if you have nothing to do with their circumstances. Likewise, you can criticize the way someone else utilizes unemployment insurance. You don’t have to pay for / directly experience something to get the right to meaningfully criticize it… you get that for free.

So somewhere back at the beginning of this I read that one of the GOP solutions, one of their proposed cuts designed to “cut” spending is to limit, or stop UI at some point be it monetary or length of time. The so called thinking behind that idea was that it would propel, or compel folks to find work , perhaps by moving to a new location where jobs exist. Really? And where exactly is that, what state is enjoying a job boom, what industry, what sector?
This is so ludicrous on so many levels to me. If there are no jobs, which I believe is a widely accepted fact, how is cutting a lifeline to folks who are unemployed going to help them find a job(s) that do not exist? The very thinly veiled suggestion, and the examples given, that folks on UI are just milking it is so bigoted, I am a bit amazed that someone would even say such a foolish thing. To be eligible for UI one has to have worked and contributed to UI prior to receiving any benefits from it, So do these people get a job so they can lose it and then collect UI?
I personally do not buy that these and other GOP cost cutting “ideas” are anything but attacks on social programs at the time they are needed the most. If that is how they are going to get us out of debt, we have a very long way to go.
Unfortunately this seems to be the best the GOP has to offer, I see many attacks, fist banging and lots of obstructionism but I have not seen any real solutions put forth by the GOP. It is worth noting that their leaders have repeatedly stated that their goal is to make Obama a one term President, but who among them has stated that their goal is to get this country back on track and offered serious solutions to do so?

Owen Owens needs to take a class in basic graph reading and arithmetic. The cited graphs are consistent with the published inflation rates the past few years 0 to 2.5% (avg=less than 2%) as reiterated by the very Federal REserve whose data he cites. There is no hyperinflation. Just another wacko tap dancing on the head of a pin for lack any support for his rant.

Lets L@@k at the graph of price of gold, silver, and even oil to some point. Don’t these figures [and they are LOW if you have the physcial commodity and want sell] suggest that an price inflation is well under way, and a moneitary deflation was averted by the Paulson extorsion of congress in 08. I would say yes it is. As for you, well, the moore you know you know, the moore i know you know less.

@Anonymous : I’ve seen it first hand. Lots of folks do exactly that. They don’t even understand that they or their former employer paid into it; they assume it is an infinite hand out at others’ expense. As duration of unemployment increases, this effect only worsens; that’s just a statistical fact.

Some things no one wants to address are education, technology, and emigration. People who lose a job and have no relevant skills to get a new, modern one to sustain their former standard of living, are forced to either go back to school or move (possibly out of the country) to get jobs doing the same sort of thing they used to. By having a tightly closed border, for example, we directly harm lots of people willing to come here and work for low wages (that would be high for them compared to what else they can find right now). Minimum wage laws have been proven again and again to have the same effect.

You ask ‘where are these magical jobs’ well, uhhh, not at the unemployment office.

I think rather than being “mean-spirited” that it is very nice of the government to extend unemployment benefits when the regular benefits have run out. These extended benefits were never paid for by the employer or the employee, so it is a very generous contribution to these unfortunate people. But how long should these benefits continue to go on? People need to learn how to be responsible for their own lives and save enough during the good years so that when the bad years come along, they can live without fear. Of course, this will never happen with many people. Why are Greece and so many European countries in such debt problems? Because they have been way to generous with the benefits for the people who now complain that these benefits are being taken away. Are we headed in the same direction?

1. “Some things no one wants to address are education, technology, and emigration.”

When they *addressed* education, they put an entire generation in deep debt through *student loans* and didn’t tell them that their expensive education was mostly the study of *theoretical* bs…

2. People who lose a job and have no relevant skills to get a new, modern one to sustain their former standard of living, are forced to either go back to school or move (possibly out of the country) to get jobs doing the same sort of thing they used to.

See – a theory with no proof. There IS a level of education that allows people to be able to do ANY job that is worth doing to sustain life maintenance for themselves and their community. It will ALWAYS be about material survival in the final analysis. Came across only ONE dentist who truly made good use of the laptop in his practice because he viewed the magic computational skills of the chip as a TOOL, not as a master. Big pharma shed thousands of R&D jobs and hired thousands to make TV commercials and push drugs *off-label”. Hear the same bs of *modern jobs* happened in all R&D intensive industries…and all this happy bs going on with *drugs* is really all about being *bigger* than Mexico’s Drug industry…?

3. By having a tightly closed border, for example, we directly harm lots of people willing to come here and work for low wages (that would be high for them compared to what else they can find right now). Minimum wage laws have been proven again and again to have the same effect.

Your &%$#*@& jackass argument for this *slave trade* is DIRECTLY inverse to your argument for education. Unfortunately for your *100% perverted* camp, there are WAY too many *middle class* people educated in what it takes to make it work FOR US, without the slaves. The only thing missing to win the JUST WAR is the careful use of targeted force – real physical force – to keep the ‘verts out of the PUBLIC library, so to speak…and that day is coming.

Changes in labor income in the USA, on the other hand, are incredibly skewed: wages don’t fall gradually during a recession so that you can adjust your fixed costs. Instead they either stay almost the same (if you remain employed throughout the recession) or go directly to zero if you are fired.

So no time to adjust fixed costs. Hence insurance is needed. If employers and employees were more flexible and instead of firing people directly they reduced work hours or nominal wages, maybe there’d be less need. But that ain’t reality.

Our braid dead political leaders in Washington, DC and with our state governments have created a very inequitable economic society throughout the nation.

Breaking up the mega banks, changing our corporate run “free” trade agreements to “fair” trade agreements and passing federal policies to drive capital into the United States to create jobs will only come with passing a federal constitutional amendment banning private campaign contributions, declaring that free speech is not money and that people are natural people not corporations.